AAC Holdings, Inc. Reports Fourth Quarter and Full Year 2016 Results

Company Release - 2/27/2017 6:50 PM ET

BRENTWOOD, Tenn., Feb. 27, 2017 /PRNewswire/ -- AAC Holdings, Inc. (NYSE: AAC) announced its results for the fourth quarter and year ended December 31, 2016. All comparisons included in this release are to the comparable prior year period unless otherwise noted.

Fourth Quarter and Full Year 2016 Operational and Financial Highlights:

Total residential bed count increased 27% to 1,140 for the quarter and sober living totaled 202

Client admissions increased 25% to 3,078 for the quarter and increased 53% to 11,849 for the year

Average daily residential census increased 25% to 835 for the quarter and increased 46% to 818 for the year; average sober living census was 128 for the quarter

Outpatient visits increased 265% to 15,817 for the quarter and increased 282% to 49,173 for the year

Revenues increased 24% to $72.4 million for the quarter and increased 32% to $279.8 million for the year

Net income to common stockholders was $0.5 million for the quarter, or $0.02 per diluted common share, and net loss to common stockholders was ($0.6) million for the year, or ($0.03) per diluted common share

Adjusted EBITDA increased 18% to $11.1 million for the quarter and increased 8% to $47.7 million for the year (see non-GAAP reconciliation herein)

Adjusted earnings per diluted common share was $0.15 for the quarter and $0.71 for the year (see non-GAAP reconciliation herein)

Amendment of Senior Secured Credit Agreement

On February 27, 2017, the Company amended the terms of its senior secured credit facility to, among other items, extend the previously scheduled step down in its total leverage covenant from 4.25x to 4.0x from March 31, 2017 to December 31, 2017, and to provide for additional Adjusted EBITDA add backs under its covenant calculation to account for its February 2017 reduction in workforce

De Novo and Acquisition Highlights:

In February 2017, received Joint Commission (JCAHO) accreditation for Laguna Treatment Hospital

In December 2016, leased one floor from New Orleans East Hospital to operate 36 in-network beds that will provide detoxification and residential treatment services. The beds are expected to be operational in the first half of 2017, subject to receiving licensure, and will be operated by Townsend's clinical staff

Placed into operation 28 sober living beds in Las Vegas and 34 sober living beds in Arlington in the fourth quarter of 2016 and as of December 31, 2016, operated 114 sober living beds in Las Vegas, 64 sober living beds in Arlington and 24 sober living beds in Oxford

"2016 was a year of significant growth as we grew from 897 to 1,140 residential beds, and we expanded into the sober living space with the addition of over 150 beds to facilitate our outpatient business," noted Michael Cartwright, Chairman and Chief Executive Officer of AAC Holdings, Inc. "The combination of organic and acquisition growth enabled us to increase our admissions by over 50%, while leveraging a significant decrease in our advertising and marketing costs. With the growth in residential and outpatient facility revenue, we were able to reduce the percentage of total revenue from our point-of-care drug testing and diagnostic laboratory services. However, despite the improvement in top-line growth, the over $8 million invested in de novo start-up expenses and approximately $8 million of expense incurred on the California legal matter contributed to a slight net loss to stockholders for the year."

"Looking ahead to 2017, we remain focused on delivering exceptional clinical quality, driving revenue and reducing our operating costs. We expect to increase our business development team by over 50% to drive utilization of our beds which will in turn drive better margins at our facilities. We expect a significant decrease of de novo start-up expenses in 2017. Our Laguna Treatment Hospital should generate significant margin contribution in 2017 now that we have received JCAHO accreditation, and Townsend and Solutions should substantially increase their contribution from last year. We also expect the standalone lab business, including third-party lab, to deliver similar financial results as we experienced in 2016 while continuing to decrease as a percentage of our total revenue. In terms of reducing our operating costs, we completed a 5% reduction of our workforce across the company on February 3rd that we expect will result in total savings of over $8 million in 2017."

"Looking beyond 2017, we are committed to continuing to diversify our payor mix as we expect to further expand our in-network beds and explore government pay options at our hospitals and outpatient centers. Based on our current pipeline, we expect to have over 1,600 residential and sober living beds by the end of 2018, representing an opportunity for us to grow our business by over 50% in the next three to five years."

Fourth Quarter 2016 compared with Fourth Quarter 2015

Revenues in the fourth quarter of 2016 increased to $72.4 million compared with $58.3 million for the same period in the prior year. Revenues were positively impacted by acquisitions and de novo projects, as well as an increase in average daily residential census and outpatient visits at our 18 standalone outpatient centers. As expected, our average daily residential revenue declined 5% to $802 for the fourth quarter of 2016 from $840 for the same period in 2015. The year-over-year decline in the average daily residential revenue was significantly impacted by a greater percentage of client related revenues being derived from in-network beds in 2016 as compared with the same period in the prior year combined with a decrease in point-of-care drug testing and diagnostic laboratory services as a percentage of client related revenue. Point-of-care and diagnostic laboratory services as a percentage of client related revenue were 20% for the quarter, flat when compared to the prior year, and decreased from 28% in the prior year to 24% for the 2016 year.

Operating expenses increased to $73.6 million in the fourth quarter of 2016 from $60.4 million in the prior year period primarily related to the growth in our residential average daily census and outpatient visits combined with an increase in salaries, wages and benefits. Salaries, wages and benefits, as a percentage of total revenues, were 50% in the fourth quarter of 2016, flat when compared with the prior year.

Net income to stockholders was $0.5 million, or $0.02 per diluted common share, in the fourth quarter of 2016 compared with net income of $0.4 million, or $0.02 per diluted common share, in the prior year period. Adjusted EBITDA increased to $11.1 million compared with $9.4 million for the same period in the prior year. Adjusted net income available to stockholders decreased to $3.4 million, or $0.15 per diluted common share, compared with $3.8 million, or $0.17 per diluted common share, for the same period in the prior year. Adjusted net income available to stockholders, adjusted diluted earnings per share and Adjusted EBITDA are non-GAAP financial measures. Tables reconciling these non-GAAP measures to the most directly comparable GAAP measures, net income available to stockholders, diluted earnings per common share and net income, respectively, are included in this release.

De Novo Activity and Bed Expansion Pipeline

By the end of the fourth quarter of 2016, Laguna Treatment Hospital was treating an average of 37 clients out of 50 staffed beds. The facility received Joint Commission (JCAHO) accreditation on February 14, 2017 and is licensed for 93 beds.

At the 100-bed Oxford Treatment Center in Mississippi, an additional 24 detoxification and 48 sober living beds are currently anticipated to be completed by the end of the second quarter of 2017.

The Company currently anticipates having 124 sober living beds at Resolutions Arlington opened by the end of the second quarter of 2017.

The Company continued development of a 150-bed residential treatment center in Ringwood, New Jersey which is expected to open in 2018.

Balance Sheet and Cash Flows

As of December 31, 2016, AAC Holdings' balance sheet reflected cash and cash equivalents of $4.0 million, net property and equipment of $141.3 million and total debt of $189.1 million. Capital expenditures in the fourth quarter of 2016 totaled $7.3 million. Cash flows used in operations totaled $1.2 million for the fourth quarter of 2016 compared with cash flows provided by operations of $0.4 million in the prior year period. Cash expenditures related to the California matter totaled $2.5 million and $1.8 million for the fourth quarters of 2016 and 2015, respectively. Exclusive of the cash expenditures related to the California matter, we would have generated positive cash flows from operations of $1.3 million for the fourth quarter of 2016. Days sales outstanding ("DSO") was 111 for the fourth quarter of 2016 compared with 96 for the prior year period. Our DSO's continue to be impacted by increased documentation requests by commercial payors prior to payment and slower collections related to laboratory services. Provision for doubtful accounts was 8.7% of total revenues for the fourth quarter of 2016 compared with 8.9% of total revenues for the prior year period.

2017 Outlook

AAC introduced its guidance for the full year 2017. Revenues are expected to be in the range of $295 million to $305 million. This estimate is based on average daily residential census of 890 to 900 and an average daily residential revenue of $725 to $750.

Adjusted EBITDA is expected to be in the range of $52 million to $54 million and adjusted earnings per diluted common share is expected to be in the range of $0.50 to $0.58. Assumptions also include an annual effective tax rate of 37% to 39% and diluted weighted-average common shares outstanding of approximately 23 million for the year.

This outlook does not include the impact of any future acquisitions, transaction-related costs, litigation settlement and expenses related to legal defenses.

With respect to our "2017 Outlook" above, reconciliation of adjusted EBITDA and adjusted earnings per diluted common share guidance to the closest corresponding GAAP measure on a forward-looking basis is not available without unreasonable efforts. This inability results from the inherent difficulty in forecasting generally and quantifying certain projected amounts that are necessary for such reconciliations. In particular, sufficient information is not available to calculate certain adjustments required for such reconciliations, including de novo start-up and other expense and acquisition-related expenses. We expect these adjustments may have a potentially significant impact on our future GAAP financial results.

Earnings Conference Call

The Company will host a conference call and live audio webcast, both open for the general public to hear, on February 28, 2017, at 8:00 a.m. CT. The number to call for this interactive teleconference is (412) 542-4144. A replay of the conference call will be available through March 7, 2017, by dialing (412) 317-0088 and entering the replay access code: 10100560.

The live audio webcast of the Company's quarterly conference call will be available online at ir.americanaddictioncenters.org. The online replay will be available on the website one hour after the call.

About American Addiction Centers

American Addiction Centers is a leading provider of inpatient and outpatient substance abuse treatment services. We treat clients who are struggling with drug addiction, alcohol addiction, and co-occurring mental/behavioral health issues. We currently operate substance abuse treatment facilities located throughout the United States. These facilities are focused on delivering effective clinical care and treatment solutions. For more information, please find us at AmericanAddictionCenters.org or follow us on Twitter.

Forward Looking Statements

This release contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are made only as of the date of this release. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "may," "potential," "predicts," "projects," "should," "will," "would," and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Forward-looking statements may include information concerning AAC Holdings, Inc.'s (collectively with its subsidiaries; "Holdings" or the "Company") possible or assumed future results of operations, including descriptions of Holdings' revenues, profitability, outlook and overall business strategy. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from the information contained in the forward-looking statements. These risks, uncertainties and other factors include, without limitation: (i) our inability to operate our facilities; (ii) our reliance on our sales and marketing program to continuously attract and enroll clients; (iii) a reduction in reimbursement rates by certain third-party payors for inpatient and outpatient services and point of care and definitive lab testing; (iv) our failure to successfully achieve growth through acquisitions and de novo expansions; (v) uncertainties regarding the timing of the closing of acquisitions; (vi) the possibility that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of an acquisition; (vii) our failure to achieve anticipated financial results from prior acquisitions; (viii) a disruption in our ability to perform definitive drug testing services; (ix) maintaining compliance with applicable regulatory authorities, licensure and permits to operate our facilities and lab; (x) a disruption in our business and reputation and potential economic consequences with the civil securities claims brought by shareholders; (xi) our inability to agree on conversion and other terms for the balance of convertible debt; (xii) our inability to meet our covenants in the loan documents; (xiii) our inability to obtain senior lender consent to exceed the current $50 million limit in unsecured subordinated debt; (xiv) our inability to integrate newly acquired facilities; and (xv) general economic conditions, as well as other risks discussed in the "Risk Factors" section of the Company's Annual Report on Form 10-K, and other filings with the Securities and Exchange Commission. As a result of these factors, we cannot assure you that the forward-looking statements in this release will prove to be accurate. Investors should not place undue reliance upon forward looking statements.

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(Dollars in thousands, except per share amounts)

Three Months Ended

Twelve Months Ended

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

Revenues

Client related revenue

$ 71,146

$ 55,450

$ 270,569

$ 205,752

Other revenue

1,206

2,832

9,201

6,509

Total revenue

72,352

58,282

279,770

212,261

Operating expenses

Salaries, wages and benefits

36,432

29,522

141,073

91,406

Client related services

6,987

4,923

24,446

15,754

Provision for doubtful accounts

6,265

5,188

21,485

18,113

Advertising and marketing

4,682

5,294

18,275

20,821

Professional fees

3,014

3,603

16,468

10,316

Other operating expenses

9,009

6,664

29,627

22,708

Rentals and leases

1,831

1,856

7,363

5,298

Litigation settlement

202

—

1,292

2,379

Depreciation and amortization

4,917

2,900

17,686

7,837

Acquisition-related expenses

263

484

2,691

3,401

Total operating expenses

73,602

60,434

280,406

198,033

(Loss) income from operations

(1,250)

(2,152)

(636)

14,228

Interest expense

2,325

1,181

8,175

3,607

Gain on contingent consideration

(1,350)

—

(1,350)

—

Bargain purchase gain

—

(1,775)

—

(1,775)

Other income, net

(587)

(697)

(500)

(725)

(Loss) income before income tax expense

(1,638)

(861)

(6,961)

13,121

Income tax (benefit) expense

(335)

(223)

(1,220)

4,780

Net (loss) income

(1,303)

(638)

(5,741)

8,341

Less: net loss attributable to noncontrolling interest

1,781

1,086

5,152

2,833

Net income (loss) attributable to AAC Holdings, Inc. stockholders

478

448

(589)

11,174

BHR Series A Preferred Unit dividend

—

—

—

(147)

Redemption of BHR Series A Preferred Units

—

—

—

(534)

Net income (loss) available to AAC Holdings, Inc. common stockholders

$ 478

$ 448

$ (589)

$ 10,493

Basic earnings per common share

$ 0.02

$ 0.02

$ (0.03)

$ 0.49

Diluted earnings per common share

$ 0.02

$ 0.02

$ (0.03)

$ 0.48

Weighted-average common shares outstanding:

Basic

23,048,474

22,002,587

22,718,117

21,605,037

Diluted

23,061,065

22,047,801

22,718,117

21,661,259

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in thousands)

December 31,

December 31,

2016

2015

Assets

Current assets

Cash and cash equivalents

$ 3,964

$ 18,750

Accounts receivable, net of allowances

87,334

60,934

Prepaid expenses and other current assets

5,181

6,840

Total current assets

96,479

86,524

Property and equipment, net

141,307

109,724

Goodwill

134,396

108,722

Intangible assets, net

10,356

9,470

Deferred tax assets

598

—

Other assets

748

1,609

Total assets

$ 383,884

$ 316,049

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$ 9,155

$ 7,878

Accrued liabilities

26,742

21,653

Current portion of long-term debt

9,445

3,611

Current portion of long-term debt – related party

—

1,195

Total current liabilities

45,342

34,337

Deferred tax liabilities

—

1,195

Long-term debt, net of current portion

179,661

140,335

Other long-term liabilities

4,093

3,694

Total liabilities

229,096

179,561

Stockholders' equity

165,106

141,654

Noncontrolling interest

(10,318)

(5,166)

Total stockholders' equity including noncontrolling interest

154,788

136,488

Total liabilities and stockholders' equity

$ 383,884

$ 316,049

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

Twelve Months Ended

December 31, 2016

December 31, 2015

Cash flows from operating activities:

Net (loss) income

$ (5,741)

$ 8,341

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Provision for doubtful accounts

21,485

18,113

Depreciation and amortization

17,686

7,837

Equity compensation

8,823

5,757

Loss on disposal of property and equipment

163

365

Gain on contingent consideration

(1,350)

—

Bargain purchase gain

—

(1,775)

Amortization of debt issuance costs

633

261

Deferred income taxes

(1,793)

962

Changes in operating assets and liabilities:

Accounts receivable

(45,838)

(46,097)

Prepaid expenses and other assets

2,510

(1,924)

Accounts payable

824

5,061

Accrued liabilities

3,135

9,463

Other long term liabilities

(394)

(171)

Net cash provided by operating activities

143

6,193

Cash flows from investing activities:

Purchase of property and equipment

(37,304)

(51,525)

Acquisition of subsidiaries, net of cash acquired

(19,150)

(90,187)

Escrow funds held on acquisition

—

(1,100)

Purchase of intangible assets

—

(540)

Purchase of other assets, net

—

(50)

Net cash used in investing activities

(56,454)

(143,402)

Cash flows from financing activities:

Proceeds from revolving line of credit, net

22,000

47,000

Proceeds from long-term debt, net

27,500

100,218

Payments on long-term debt and capital leases

(6,210)

(27,572)

Repayment of long-term debt — related party

(1,195)

(542)

Repayment of subordinated notes payable

—

(945)

Payment of debt issuance costs

(570)

(2,211)

Redemption of BHR Series A Preferred Units

—

(8,529)

Net cash provided by financing activities

41,525

107,419

Net change in cash and cash equivalents

(14,786)

(29,790)

Cash and cash equivalents, beginning of period

18,750

48,540

Cash and cash equivalents, end of period

$ 3,964

$ 18,750

AAC HOLDINGS, INC.

OPERATING METRICS

Unaudited

Three Months Ended

Twelve Months Ended

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

Operating Metrics:

Average daily residential census1

835

670

818

562

Outpatient visits2

15,817

4,328

49,173

12,879

Average daily residential revenue3

$ 802

$ 840

$ 800

$ 940

Average net daily residential revenue4

$ 734

$ 759

$ 735

$ 854

New admissions5

3,078

2,462

11,849

7,763

Bed count at end of period6

1,140

897

1,140

897

Effective bed count at end of period7

1,067

785

1,067

785

Average effective bed utilization 8

79%

84%

82%

88%

Days sales outstanding (DSO)9

111

96

114

105

1

Includes client census at all of our owned and leased residential facilities.

2

Represents the total number of outpatient visits at our stand-alone outpatient centers during the period.

3

Average daily residential revenue is calculated as total revenues from all of our owned and leased residential facilities during the period divided by the product of the number of days in the period multiplied by average daily residential census.

4

Average net daily residential revenue is calculated as total revenues from all of our owned and leased residential facilities less provision for doubtful accounts during the period, divided by the product of the number of days in the period multiplied by average daily residential census.

5

Includes total client admissions at our owned and leased residential facilities for the period presented.

6

Bed count at end of period includes all beds at owned and leased inpatient facilities.

7

Effective bed count at end of period represents beds for which our facilities are staffed based on planned census.

8

Average effective bed utilization represents average daily residential census divided by the average effective beds during the quarter.

9

Revenues per day is calculated by dividing the revenues for the period by the number of days in the period. Days sales outstanding is then calculated as accounts receivable, net of allowance for doubtful accounts, at the end of the period divided by revenues per day.

De novo start-up expenses and other primarily relate to de novo facility net operating losses with respect to the opening of a de novo facility and continuing for a period of time after the facility has begun to accept clients, historically six to nine months, as the operations and census increase to what we believe are normalized operating levels.

(2)

Facility closure and operating losses and expenses include both the operating losses and expenses associated with the facility closure of The Academy and FitRx for all periods presented.

Reconciliation of Adjusted Net Income Available to AAC Holdings, Inc. Common Stockholders to Net Income Available to AAC Holdings, Inc. Common Stockholders

Three Months Ended

Twelve Months Ended

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

Net (loss) income available to AAC Holdings, Inc. common stockholders

$ 478

$ 448

$ (589)

$ 10,493

Non-GAAP Adjustments:

Litigation settlement and California matter related expense

1,093

1,678

8,690

5,446

Acquisition-related expense

406

760

3,252

3,801

De novo start-up and other expense

3,395

2,777

8,663

3,369

Facility closure operating losses and expense

—

1,116

771

3,114

Gain on contingent consideration

(1,350)

—

(1,350)

—

Bargain purchase gain

—

(1,775)

—

(1,775)

Redemption of BHR Series A Preferred Units

—

—

—

534

Income tax effect of non-GAAP adjustments

(621)

(1,180)

(3,234)

(4,064)

Adjusted net income available to AAC Holdings, Inc. common stockholders

$ 3,401

$ 3,824

$ 16,203

$ 20,918

Weighted-average common shares outstanding - diluted

23,061,065

22,047,801

22,718,117

21,661,259

GAAP diluted earnings per common share

$ 0.02

$ 0.02

$ (0.03)

$ 0.48

Adjusted diluted earnings per common share

$ 0.15

$ 0.17

$ 0.71

$ 0.97

Adjusted EBITDA, adjusted net income available to AAC Holdings, Inc. common stockholders, and adjusted diluted earnings per common share (herein collectively referred to as "Non-GAAP Disclosures") are "non-GAAP financial measures" as defined under the rules and regulations promulgated by the U.S. Securities and Exchange Commission, each of which are defined below. Management believes the Non-GAAP Disclosures provide investors with additional meaningful financial information that should be considered when assessing our underlying business performance and trends. We believe the Non-GAAP Disclosures also enhance investors' ability to compare period-to-period financial results. The Non-GAAP Disclosures should not be considered as measures of financial performance under U.S. generally accepted accounting principles ("GAAP"). The items excluded from the Non-GAAP Disclosures are significant components in understanding and assessing our financial performance and should not be considered as an alternative to net income or other financial statement items presented in the condensed consolidated financial statements. Because the Non-GAAP Disclosures are not measures determined in accordance with GAAP, the Non-GAAP Disclosures may not be comparable to other similarly titled measures of other companies.

Management defines Adjusted EBITDA as net income (loss) adjusted for interest expense, depreciation and amortization expense, income tax (benefit) expense, stock-based compensation and related tax reimbursements, litigation settlement and California matter related expense, acquisition-related expense (which includes professional services for accounting, legal, valuation services and licensing expenses), de novo start-up and other expenses, facility closure operating losses and expense (associated with The Academy and FitRx), gain on contingent consideration associated with our acquisition of Townsend, and bargain purchase gain associated with our acquisition of Sunrise House in the fourth quarter of 2015.

Management defines Adjusted Net Income Available to AAC Holdings, Inc. common stockholders as net income (loss) available to AAC Holdings, Inc. common stockholders adjusted for litigation settlement and California matter related expense, acquisition-related expense (which includes professional services for accounting, legal, valuation services and licensing expenses), de novo start-up and other expenses, facility closure operating losses and expense (associated with The Academy and FitRx), gain on contingent consideration associated with our acquisition of Townsend, bargain purchase gain associated with our acquisition of Sunrise House in the fourth quarter of 2015, redemption of BHR Series A Preferred Units, and the income tax effect of the non-GAAP adjustments at the then applicable effective tax rate.

Adjusted diluted earnings per common share represents diluted earnings per common share calculated using adjusted net income available to AAC Holdings, Inc. common stockholders as opposed to net income available to AAC Holdings, Inc. common stockholders.

With respect to our "2017 Outlook" above, reconciliation of adjusted EBITDA and adjusted earnings per diluted common share guidance to the closest corresponding GAAP measure on a forward-looking basis is not available without unreasonable efforts. This inability results from the inherent difficulty in forecasting generally and quantifying certain projected amounts that are necessary for such reconciliations. In particular, sufficient information is not available to calculate certain adjustments required for such reconciliations, including acquisition-related expenses and de novo start-up and other expense. We expect these adjustments may have a potentially significant impact on our future GAAP financial results.

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